Nothing good lasts forever, including the amazingbull market
that investors have enjoyed thisyear .
Fueled by ultra-low interest rates, solid corporateearnings
and a Federal Reserve that says itwill do whatever it takes to
jump-start theeconomy ,stocks have been breaking record after
record as they surge higher. The Dow Jones Industrial Average has
rallied more than 1,800 points since Jan. 1 -- andmoney keeps
pouring into themarket .
But I have noticed five specific clues that are pointing
toward an end to this extremelybullish market cycle.
1. Headline risk
When you start seeing the media boasting about how great thestock
market is performing and how everyone is getting involved, it's
time to be extra cautious.
Over the weekend, I came acrossbearish signals from two
distinctly different places: aWall Street Journal article titled
"Mom & Pop Run With the Bulls," and a cab driver who offered
me stock tips.
While traveling down Fifth Avenue in downtown Manhattan, the
taxi driver overheard me talking stocks on the phone and offered
his favorite companies -- and even a few trading tips.
It is amazing how much everyone thinks they know about the
market and trading. It's said on the Street that once you hear
the shoe shiner, barber and cabbie talking about the market, it's
a sure sign that bullish trends are coming to an end.
No one knows for sure, but I am certain there are several
formerhedge fund managers driving New York City cabs right now,
so maybe my stock-picking cabbie managed a $100 million
short-sellingfund last year. Who knows?
When I see this type of behavior in the stock market, it gives
me flashbacks to "Black Monday " crash during the late summer of
1987, when the writing was on the wall. The Dow Jones Industrial
Average dropped 22.61% in one day -- its largest decline in
2. Global uncertainty
There seems to be another crisis arising in the eurozone every
First, it was Iceland's financial crisis, Spain'sbailout and
then Greece's extreme debtissues . Now Cyprus is actually seizing
bank accounts to pay its national debts, as I mentioned
While we may feel insulated in the United States, the
worldwide financial system is interconnected to a surprising
degree. What's next in the eurozone? Will Italy or an even larger
nation reach out for help?
It's possible the United States will eventually be asked to
step into the fray to assist. This is a very real concern and may
weigh heavily on the stock market, should rumors even begin. In
addition, growing tension from North Korea may also soon bring
pressure to the stock market.
3. Higher interest rates
Although Federal Reserve ChairmanBen Bernanke has assured
investors he will not consider raising interest rates until
theunemployment rate drops to 6.5% from its current 7.6% -- which
isn't expected to happen until 2015 -- growth in payrolls or a
jump ininflation may trigger an increase.
In addition,the Fed could start cutting back on its massive
bond-buying this summer should the economy continue to pick up
steam. The extremely bullish effects of the Fed's $85 billion
monthly purchases in Treasurybonds and mortgage-backed securities
is pushing down interest rates and encouraging businesses to
John Williams, president of the San Francisco Fed, has
expressed optimism in the plan.
"I expect we will meet the test for substantial improvement in
the outlook for the labor market by this summer. If that happens,
we could start tapering our purchases then," Williams has said.
If this occurs, then it will have dire effects on the bull
4. Too much risk-taking
Risk-taking is exploding in today's market.
Remember, excessive risk is what led to the financial crisis
in 2008, and it can easily happen again. More than $150 billion
injunk bond debt has been issued in the first quarter. If the
warnings of abond market bubble bursting turn out to be accurate,
thenhigh-yield bond investors could suffer massive losses.
5. Another housing bubble
The housing market has been rebounding since late 2012 and has
been naturally expanding since hitting rock bottom. In addition,
the Fed's low-interest-rate policies have greatly helped the
But reports from Washington say the Obama Administration is
encouraging further growth by directing banks to lend to risky
Yes, this is exactly what caused the housing bubble crash, and
it will repeat, should consumer debt loads become unmanageable
once again. Adding to this worry is the 6.4% growth of household
debt in the fourth quarter of 2012 -- the biggest jump since
Risks to Consider:
While these five points are signals the bull market may be
topping out, no one knows for certain when or if a pullback will
actually happen, and there's no telling how sharp it may be.
Action to Take -->
While there are still greatinvestments available, it's good to
exercise caution as the markets reach new highs and the economy
begins showing similar signs seen during the months leading up to
the prior financial crisis.
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